Health Care Reimbursement Account (HCRA)

A Health Care Reimbursement Account (HCRA) [or Flexible Spending Account (FSA)] is a tax-exempt account funded by an employee or employer that the employee uses to pay health care expenses. Employees cannot withdraw cash from an HCRA to pay for things other than health care.

The employee decides in advance how much money to put into the HCRA and loses any unspent money in the HCRA at the end of the year. This creates a “use it or lose it” incentive for higher health care spending toward the end of the year and prevents employees from using the account to save money. However, if the Medicare reform bill that is currently being deliberated by Congress (July, 2003) is passed, then up to $500 in unspent money at the end of the year may be “rolled over” to the next year.

Health Care Reimbursement Accounts have been around for years and have not been central to the movement toward Consumer Driven Health Care. They are generally used to supplement generous health insurance — paying the already-low copays and deductibles with untaxed dollars. In this respect, they are actually counter to the cost-containment consumer incentives that are central to Consumer Driven Health Care.

In an ideal world where companies have unlimited money to spend on benefits, generous health insurance accompanied by a HCRA would be great for employees. However, in the more realistic situation where money is limited, employees might prefer more efficient health benefits and more take-home pay — vs. — less efficient health benefits and less take-home pay. We discuss HCRAs here because they are common, often confused with the new CDHC accounts, and a good starting point for comparing the new CDHC accounts.